Beijing Airport: good investment?

Following on our positive review of the new Beijing airport’s Terminal 3, the Red Cat Journal this week takes a look at the stock, Beijing Capital International Airport Co. Limited (0694.HK). It has fallen from a high of HK$18 last year to around HK$6.20 per share now. That is certainly a dramatic fall.

Two problems are weighing on the share price at the moment. First, spending for the acquisition of the new Phase III project (including Terminal 3) is coming in about 20% higher than the original forecast of RMB 22 billion (US$2.8 billion). This means that depreciation expense will be higher than originally expected, hurting future reported earnings, and it means that Beijing Airport might need to raise more new debt and equity, diluting existing shareholders. The second thing which has hurt the shares is that a new tariff scheme for arriving and departing airplanes and passengers will begin on March 1, 2008. When the new tariff structure was announced, it was seen as disappointing by some in that the tariffs were lower than expected. It appears that the regulators have long-term development of air travel volume in China in mind more than short-term earnings for airports.

On the positive side, Beijing Airport’s capacity is going from 35 million to 78 million passengers per year. A new runway will allow more takeoffs and landings per year, including the new Airbus A380. Freight capacity is going up from 0.78 million tons a year to 1.8 million tons per year. Commercial space, for shops and other services, is going to more than double. Overall revenue should see healthy growth in the coming years, although near-term earnings may take a hit from the issues cited above.

Looking at Beijing Airport as a stock, it looks like a buy only if you have a long-term horizon and one to be potentially avoided if your time horizon is short. Looking out longer term, the real issue is pricing power. On that front, the Beijing Airport looks like a very good inflation hedge over time. It has a monopoly in what will be one of the world’s busiest cities for air travel and the costs for the recent large expansion have already been largely determined. If over time, the airport can gradually re-price services upwards, the long-term future for the airport is bright. If you think about the airport as a piece of real estate, it looks like a prime piece of property whose value should only increase over time.